I'm looking at entering a Bear Call Spread on TELK. BTO 35 JAN C and STO 30 JAN C for a 0.60 net credit. TELK has never been over $30.00 and is currently trading around $16.25. They're a biotech company that's in Phase 3 trials but according to the company's website, one of the trials is still open for enrollment. The only thing I can see that would cause this stock to go over $30.00 would be an FDA approval on one of their Phase 3 drugs. I'm looking for someone to talk me out of this trade - if it seems too good to be true.....
.60 upside, 4.40 downside. I'd say the odds are not in your favor. See reverse of NFLD if FDA approves. These can double, but I like the back spread better in these names.
Thanks for your reply! I really appreciate it. I saw what hapened to NFLD and I know TELK can explode, hence, the price of the premium for the JAN 30 C. A backspread is a great idea. I have another question for you, if you don't mind. I'm with OptionsXpress and I'm wondering how you came up with the amount of 4.40 for the downside. I obviously have a lot to learn. Thanks for your help.
Thanks for your reply! I really appreciate it. I saw what hapened to NFLD and I know TELK can explode, hence, the price of the premium for the JAN 30 C. A backspread is a great idea. I have another question for you, if you don't mind. I'm with OptionsXpress and I'm wondering how you came up with the amount of 4.40 for the downside. I obviously have a lot to learn. Thanks for your help.
You get a 60 cent credit for the combo. At expiration, if the stock is $35 or more, the 30 C will be worth $5 more than the $35 C, so the combo will be worth -$5.
Got it - thanks. BTW - I decided to paper trade this one. If anyone is interested, I'll post the results when I exit the trade.
TELK had some bad news which caused the stock to drop to around $5. The Bear Call net credit spread is locked in. I guess this could have just as easily gone the other way. Big explosive move - probably not the best candidate for a net credit spread. Good candidate for back spread though, as suggested by Straddler. Thanks!
Hi NetCredit guy. Generally a Bear Call spread is a limited R/R when you are more mildly bearish on a stock. With biotech's as you said they are highly volatile thus a more aggressive type of approach whould allow maximum use of its vol's. IV trader does a number of reverse Calendars on this sort of stock and as was pointed out a backspread is a great choice and if you have some understanding of the stock as you seemed to have with this one just the straight put (of course thats hindsight) would have been good as well. I just wouldn't do a Bear Call spread on any stock this volatile.